The New Science of Asset Allocation: Risk Management in a Multi-Asset World

CHAPTER 10

Myths of Asset Allocation

From time to time, we have to challenge our strongly held beliefs. This is a difficult endeavor because it may very well be that mistakes were made that upon reflection could have been prevented. The financial disturbances of 2007 and 2008 have forced the discipline of asset allocation and those who profess to practice it to enter into this new reality phase. However, what we know from experience is that if this reality check suggests additional oversight and the possible loss of investor allure (as well as the corresponding fees), many asset allocators will simply turn a blind eye and hope the markets right their mistakes so that they can return to the days when they were viewed as magicians or wizards. It is not a coincidence that most asset allocation programs are linked to investment vehicles that “offer return opportunities not easily found in other investment vehicles.” Who would want an asset allocation program that offers return opportunities easily found in other investment vehicles or other investment firms? For the most part, asset allocation services have been turned into a mere stalking horse for a firm’s investment products and are offered as essentially a free service. In the wake of recent events, investors are discovering that these “free asset allocation service models” contain a significant and at times hidden price.

In contrast, asset allocation looks beyond particular products and instead focuses on the asset strategies ...